Lobbyists Seeking Stay of Key Tax-Law Rules

Washington--Lobbyists from business and education groups are racing
against the clock to win Congressional approval this term for a measure
that would delay for a year the effective date of a federal law making
some fringe benefits taxable.

At issue is Section 89 of the new federal tax code enacted in 1986.
Under that provision, such benefits as life-insurance annuities and
paid health-care plans will become taxable in January if they are found
to be part of a program that discriminates against lower-paid
workers.

Educators said last week that some of the perquisites enjoyed by top
school administrators nationwide may be affected by the law. And they
warned that many school districts are not now prepared to deal with the
logistical and other problems involved in the law's implementation.

"This is going to catch a bunch of people by surprise," predicted
Bruce Hunter, the associate executive director of the American
Association of School Administrators.

Administrators who are having their contracts renewed this year are
reviewing the law's ramifications with their boards, he said. But those
who are not may have little understanding of its possible implications
for their tax status.

In addition, school districts are working in a virtual legal vacuum
as they try to determine the ins and outs of the law's compliance
requirements, said Katharine Herber, a tax lobbyist for the National
School Boards Association here.

"Once again, Congress has acted and left a void," she said. "There
are law firms in this town that have people working on Section 89 seven
days a week."

To provide school officials with what Ms. Herber called "breathing
room," education groups have allied themselves in their lobbying effort
with some 200 other organizations representing various business
interests. The measure that they are trying this month to shepherd
through the Senate would make a number of technical corrections to the
1986 tax code.

In addition to the one-year delay on the fringe-benefit provision,
the 900-page legislative proposal contains modifications that would
prevent the Internal Revenue Service from taxing the sick leave and
vacation pay accrued by employees of government and nonprofit
organizations.

It also would alter the taxation requirements for employer-paid
education compensation. And it contains language that would adjust the
code's pension provisions to ease an excessive tax burden on retired
teachers in the states of Hawaii, Pennsylvania, and Washington.

But passage of the measure in this term, observers said, has been
complicated by several factors: the Congress's rush to adjourn by the
end of September, the fact that the Senate Finance Committee's
chairman, Lloyd Bentsen, is running for Vice President, and lawmakers'
concern that the combined changes proposed have no impact on the
federal treasury.

"We're worried that they are not going to get it done," said Mr.
Hunter of the aasa "Everything has to fall just right."

Ms. Herber, however, predicted that if Senator Bentsen returns to
Washington from the campaign trail, "we may have a shot at it."

Though several features of the adjustment measure would have impact
on school districts and their employees, its deferment of Section 89 is
receiving the lion's share of attention from education groups.

That provision represented an attempt in the 1986 tax-reform
legislation to end discrimination in the awarding of fringe benefits by
requiring that they meet specific criteria to retain tax-exempt
status.

Section 89 sets forth a discrimination test for benefits programs
that includes the following requirements:

Ninety percent of the lower-paid employees must be eligible to
participate in the same fringe-benefits plan that is offered to highly
compensated employees, and their benefits under the plan must be at
least 50 percent as valuable as those provided for the highly paid
employees.

At least 50 percent of the lower-paid employees must be eligible for
any individual component of the benefits package, such as a
life-insurance, health-care, or retirement benefit.

The benefits plan may not contain any provisions relating to
eligibility that discriminate against lower-paid employees.

If any single fringe benefit violates the anti-discrimination
guidelines, the employees classified as highly paid must pay taxes on
the amount they receive that is above what is offered to lower-paid
employees.

But according to many observers here, lingering confusion over the
compliance procedure is making it difficult for some business firms,
government agencies, and nonprofit organizations to determine the
status of their plans or employees.

"There's this mad scrambling across the United States as employers
are trying to determine whether or not their plans are
discriminatory,'' said Ms. Herber.

For school districts, she said, this means trying to calculate the
value of benefit plans for each group of employees, determining how
many employees are considered highly compensated under Section 89, and
then tallying up the number of lower-paid employees who participate or
should participate in the benefits.

The proposed Senate bill would delay Section 89's effective date
from Jan. 1, 1989, to Jan. 1, 1990. Supporters said the delay would
give businesses and other organizations time to figure out how the
provision is supposed to work--and the government time to issue more
detailed guidelines.

"We don't necessarily want it repealed," Ms. Herber said. "People
need breathing room so they can figure out how to put this
together."

She said that to calculate the value of a benefits package, "you
would almost have to write to every former employee and find out how
much in benefits they received."

The school-boards lobbyist added, however, that benefit plans
offered by many smaller districts probably would pass the
discrimination test because of their small number of employees
classified as "highly compensated."

But Mr. Hunter said he was concerned that many districts and
administrators might still be unaware of the section and its
ramifications.

Many superintendents of schools, he said, receive special benefit
items as part of their compensation, such as life-insurance annuities,
that may be taxable under the new law. And in some districts, he noted,
principals, program directors, and associate superintendents as well
may fall into the "highly compensated" category and be taxed for any
special perquisites they receive.

Education groups are also seeking in the Senate bill to reverse an
irs ruling that makes taxable the sick leave, vacation pay,
compensation time, and disability pay carried over by employees from
one year to the next.

In the irs interpretation, those accrued benefits constitute
"nonelective deferred compensation" and are taxable under section 457
of the 1986 tax-reform law even for government workers and employees of
nonprofit organizations.

Those who support the reversal of that interpretation say it is
without basis. They argue that the Congress, in enacting section 457,
was attempting to extend the tax-exempt status of so-called 401-K plans
to include employees of nonprofit organizations. State and local
government employees were already provided such tax-exempt status.

The Senate measure would also address the tax-code provision that
makes taxable any employer-provided educational assistance. The 1986
tax law removed the $5,400 allowable in tax-free employer-paid
assistance.

The House, which has already passed its version of the corrections
legislation, extended the tax-free status of the educational benefit
for three years, retroactive to Dec. 31, 1987. But it also put a $1,500
cap on such assistance.

The changes proposed would not exclude from federal taxable income
any employer-paid program that leads to a degree.

That would mean, Ms. Herber noted, that teachers enrolled in
district-paid education courses leading to an advanced degree would not
have a tax advantage.

But the measure would allow businesses to provide retraining or
enrichment programs for employees that would not be taxed.

Also to be modified by the pending legislation is a tax provision
that has resulted in double payments by teachers in Hawaii,
Pennsylvania, and Washington of federal taxes on their retirement
funds.

In Pennsylvania, teachers paid state and federal income taxes on
their contributions to the retirement fund until 1984, when a state
policy change allowed them to take advantage of the federal
government's so-called three-year rule.

That rule allowed teachers to make a lump-sum withdrawal of three
years' worth of pension funds on the assumption that the money
withdrawn had come from their own contributions--and, thus, had already
been taxed as income. Under the 1986 federal rules, however, the
lump-sum withdrawal is subject to federal taxation.

According to Walt Carmo, assistant executive director of government
relations for the Pennsylvania State Education Association, the
legislation before the Congress would allow teachers in his state and
others with similar policies to make the lump-sum withdrawal without
paying the federal tax.

Mr. Carmo said he was optimistic that the Senate would take some
action before adjourning this month. "I think they want to get this
behind them," he said.

Vol. 08, Issue 03

Notice: We recently upgraded our comments. (Learn more here.) If you are logged in as a subscriber or registered user and already have a Display Name on edweek.org, you can post comments. If you do not already have a Display Name, please create one here.

Ground Rules for Posting
We encourage lively debate, but please be respectful of others. Profanity and personal attacks are prohibited. By commenting, you are agreeing to abide by our user agreement.
All comments are public.